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Half Year Economic and Fiscal Update 2015

Economic Outlook

  • Global economic growth is expected to recover gradually in 2016, following a downturn in 2015, as policies support demand and recoveries become entrenched. However, the outlook for New Zealand's trading partner growth is weaker throughout the forecast horizon compared with the Budget Update. At present, risks to the global economy are skewed to the downside, particularly in relation to the risk of a sharp slowing of growth in China and its impact on other economies, and the risk of the impact of monetary policy tightening in the US on emerging market economies.
  • The weaker global growth outlook is expected to keep New Zealand's key commodity export prices low in the near term. Dairy export prices are expected to recover from the first quarter of 2016, though more gradually than assumed in the Budget Update. Oil prices are forecast to recover steadily, as expected in the Budget Update, although from lower levels. As a result, the terms of trade are forecast to show a subdued recovery from mid-2016 relative to the Budget Update forecasts.
  • Net migration inflows reached a record high of 62,500 over the year to October 2015. Annual net inflows are now expected to remain strong through to the March 2016 quarter before returning to the long-run average of 12,000 in the year ended March 2018.
  • Domestic demand growth is expected to remain weak until the middle of 2016. Forecasts show private consumption growth (on an annual average basis) slowing until the middle of 2016, partly reflecting the drop in farm incomes and a weakening of the exchange rate. Strong El Niño conditions are also expected to contribute to lower agricultural production in early 2016. Residential investment growth is assumed to slow with reduced impetus from the Canterbury rebuild. However, growth in the near term is expected to be supported by housing market activity in Auckland and surrounding regions, and strong growth in travel services exports.
  • Demand growth picks up after mid-2016 as exports respond to the recovery in the terms of trade and a weaker exchange rate, and as the agricultural sector recovers from El Niño. Monetary policy settings are expected to stimulate the domestic economy in the near term. The unemployment rate is forecast to increase from 6.0% in September 2015 to 6.5% in March 2016 before declining to reach 4.5% by September 2019.
  • Annual consumer price inflation is forecast to remain below 1.0% until the end of 2015 before rising to 1.9% in mid-2016 and remaining around 2% thereafter. Tradables inflation is expected to pick up sharply from early 2016 as the low New Zealand dollar flows through into higher prices, while non-tradables inflation rises from September 2017 as spare capacity in the economy reduces. Overall inflation forecasts are similar to the Budget Update forecasts as higher tradables inflation offsets lower non-tradables inflation in the near term (Figure 2).
Figure 2 - CPI inflation
Figure 2 - CPI inflation   .
Source: Statistics New Zealand, the Treasury
  • Monetary conditions are assumed to become more accommodative as the policy interest rate is reduced further[1] and as the exchange rate continues to depreciate in 2016 as monetary policy tightens in the US. Short-term interest rates are forecast to increase gradually from early 2017 as inflation returns to 2%. The exchange rate is also expected to increase from around the same time with the increase in interest rates and improvement in the terms of trade.
  • Although real GDP growth turned out to be lower than expected, annual average nominal GDP growth of 2.8% in the year to June 2015 was higher than forecast in the Budget Update. Annual average nominal GDP growth is forecast to slow to 1.8% in the year to June 2016 and recover thereafter to average 4.3% over the five years to June 2020. Compared with the Budget Update, nominal GDP growth is weaker in 2016 and 2017 owing to the income and price effects associated with a weaker terms of trade and lower real GDP growth, but is stronger in the subsequent forecast years.Nominal GDP is forecast to be a cumulative $17 billion lower compared with the Budget Update over five years to June 2019.


  • [1]Following finalisation of the economic forecasts on 20 November, the Reserve Bank reduced the Official Cash Rare (OCR) by 25 basis points on 10 December, in line with this economic forecast assumption.
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